Recent appeals case from America's heartland teaches a valuable lesson: Experts who issue ambiguous written reports can cause unnecessary delays and costs.
On the other hand, if your expert's report develops a strong, unbiased case, courts will usually rely on it. Comprehensive reports provide enough detail to help recreate the expert's analyses and conclusions — and, if necessary, prepare alternative calculations using different assumptions.
Here's a summary of a recent Wisconsin Court of Appeals case that deals with this issue, along with a checklist of items that comprehensive valuation reports cover. (Swiderski Equipment, Inc. and Alex K. Swiderski v. James Swiderski, 374 Wis.2d 438)
Company Pitches a Buyout
In January 2013, Swiderski Equipment, a farm equipment company owned by a father and son in in Wisconsin, offered to buy out a minority shareholder for $1,000 a share. The buyout price followed a corporate redemption agreement (CRA) that the owners entered when the business was formed in 1986. The CRA's fixed buyout price had never been updated.
The Circuit Court of Outagamie County, Wisconsin, ordered the son to accept the company's buyout of his 510 shares for $510,000. The son appealed, and a Wisconsin Court of Appeals remanded the case for an appraisal.
The company hired an expert who valued the son's shares at $615,000 as of December 31, 2012. But this updated valuation didn't satisfy the son. He argued that it was unclear from the written report whether the expert had analyzed the reasonableness of owners' compensation or taken discounts for lack of control and marketability.
So, on a second round of appeal, the expert struck out — that is, his report was disregarded because it was unclear on these key points. As a result, the case was, again, remanded to the circuit court for a second appraisal.
Writing Your "Playbook"
Written expert reports are tools that help judges and jurors understand the analyses experts perform to arrive at their conclusions. Professional organizations generally don't require business valuation experts to issue written reports, but they can be essential when an expert is given limited opportunity to testify in court. In fact, in some situations — such as certain appeals and U.S. Tax Court cases — the written report may serve as an expert's only form of direct testimony.
Judges and jurors also may refer to an expert's report during deliberations. So, it's important to provide enough detail in the report to allow the person who determines facts to verify the expert's analysis — or perform an independent estimate of value using similar methodology with different assumptions.
Following the Rules
Although there's no prescribed format for business valuation reports, a comprehensive one will address the following elements:
- Definition of the assignment, including the name of the company, size of the block, effective date, and basis of value such as control or minority or nonmarketable,
- Purpose of the valuation (for example, estate tax, marital dissolution, shareholder dispute, M&A or compliance with Generally Accepted Accounting Principles),
- Definition of the standard of value (for example, fair value, strategic value or fair market value),
- History of the company and nature of operations,
- Analysis of the company's financial performance and risk,
- Analysis of the industry outlook and general economic conditions on the valuation date
- Prior transactions of the company's stock, including past appraisals and purchase offers,
- Application of valuation methods under the cost, market and income approaches, and
- Application of valuation discounts, including discounts for lack of control and marketability.
Comprehensive reports show the scope of evidence that the expert considered in arriving at his or her conclusions. Experienced experts openly acknowledge and reconcile evidence that contradicts with their conclusions. Often there are valid reasons for contradictory evidence.
Shortcuts Can Be Costly
Does your valuation expert's report cover all the bases? Some experts issue abbreviated letter reports or simple calculations to save client's time and money. But this case demonstrates that a full written report can often be money well spent.
WILLIAM P. ALLEN, CPA/ABV, CFE
Bill is a member of the American Institute of Certified Public Accountants accredited in Business Valuations (ABV); a Certified Fraud Examiner (CFE) accredited by the Association of Certified Fraud Examiners; and the New York State Society of Certified Public Accountants. He has more than 5 years' experience in public accounting serving both commercial businesses and nonprofit organizations. As a member of the Brisbane team, Bill is responsible for valuation, forensic accounting, and litigation support services. Bill is a graduate of Le Moyne College and has worked with our Firm since graduating in 2006.